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Shift debts to your mortgage?

Beware, it's not the easy saving it seems

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Updated July 2017

It feels like a no-brainer: shift expensive credit card or loan debts onto a cheap mortgage and bazinga, you’re quids in. However, though it may seem simple, done wrong it can end up costing more, risking your home, or putting you in dreaded negative equity.

So here are the six key things anyone planning to shift their debts onto their mortgage needs to know, to help work out if it’s right for them.

Your home is at risk with a mortgage

A mortgage is a secured debt, and while getting secured borrowing may sound better, it’s the lender, NOT you, who gets the security. This is in the form of its right to take your home if you can’t repay.

This security is one of the reasons mortgage rates are much lower than other lending. The fact you have collateral - your home - means if you don’t repay, the lenders' losses are limited, as it can take your assets.

So given the choice, with everything else remaining equal, it’s always better for you to have UNSECURED lending so if you can’t repay, your house is safe (or at least it’s much more difficult for them to take it).

And by getting a bigger mortgage to pay off your credit cards and loans, you are effectively converting unsecured debt into secured.

Is it cheaper to cut credit card costs instead?

As shifting to secured debt is only worthwhile if you save serious cash, this isn’t simply a question of “can I save money by moving my card and loan debts onto my mortgage?” Instead, you need to...

Work out if shifting debts to your mortgage is cheaper than shifting them to the cheapest new credit card or loan

After all, saving money without securing is better. So first check out the following routes, then compare the best option they give you against the cost of securing.

  • Balance transfer credit cards.

    If you’ve existing credit card debts and a decent credit history, balance transfer deals let you shift debts to a new card at much cheaper rates. If you repay in a relatively short time (a couple of years) these will often vastly reduce the cost, undercutting even a mortgage.

    For full help and all the best buys see the Best Balance Transfer guide and Official APR examples.

    Businessman with credit card
  • Do the credit card shuffle

    Even if you’re refused new credit, you may be able to use your existing debts more efficiently. There are a hidden range of existing customer balance transfer deals too. If you aren’t up to your credit limit on all cards, you may be able to utilise these to radically cut costs. Full help in the Credit Card Shuffle guide.

  • Shift existing loans.

    Cutting the cost of loans is much trickier, both as there are small penalties and because loan interest rates have increased over recent years. If your loan rate is very high and your credit score has improved, it may be possible, see the existing loan cost cutting guide for more (including a calculator).

Of course, if you've a poor credit score this won't always work, and the rate you get may still be high (see the Problem Debt guide for more).

Once you know the cheapest unsecured rate you can get for your existing debts (which may well just be your current situation), it's time to compare that to the cost of switching debts to your mortgage.

It’s the interest COST, not RATE, that counts

Which of the following costs less? Borrowing £10,000 on an 18% loan, or on a 5% mortgage?

If you’re saying “duh, don’t ask the bleedin obvious” then beware, as you don’t have enough information to answer correctly.

The cost of a debt is a function of both the rate AND how long you borrow for (the longer it’s for, the costlier it is). It is crucial to factor how long it’ll take you to repay when working out which is cheapest.

After all, a mortgage is effectively just a loan, but over a much longer period - typically 25 years - while cards and loans are usually repaid much more quickly and this has a big impact. If you were to borrow...

Borrow £10,000 at 5% over 25 years = £7,500 interest, Borrow £10,000 at 18% over 5 years = £5,200 interest

So sometimes a higher interest rate repaid quicker can be the cheapest option. Try it for your own situation on this calculator for a rough idea.

The Borrowing Calculator

We've created a special calculator that roughly shows you the cost of your loan or mortgage. Unfortunately, this doesn't work on mobile, just on desktop, so why don't you just email yourself this guide.

Borrowing Cost Calculator How much will my extra borrowing cost?

An amount is required.

The amount must be a valid number.

The amount must be greater than 0.

An interest rate is required.

The interest rate must be a valid number.

A period of time to borrow for is required.

The period of time must be a valid number.

The period of time must be greater than 0.

Your Result

To borrow £{{ vm.resultLoanAmount | number: 0 }}, it will cost £{{ vm.resultPerMonthAmount | number: 0 }}/month

Over the life of the loan, this costs roughly £{{ vm.resultInterestAmount | number: 0 }} in interest


Now it should be noted, if you factor inflation in (which means the value of money diminishes over time) paying more in the future doesn’t hurt as much.

Will your lender allow you to add debt to your mortgage?

Don’t assume your lender will let you add debt to your mortgage, and even if it does, you must consider the impact on your ability to remortgage in future (getting a new deal either for moving house or to cut costs - see the remortgage guide).

One issue is your credit history. Even if it was good enough to get a mortgage initially, it may not be good enough now as criteria is very strict. If your salary has fallen, this could also hurt your chances.

The other key mortgage metric is three little letters... LTV

LTV = Loan to value -
    The size of your borrowing compared to your home's current value.

The lower the LTV, the better mortgage deal you are usually able to get. These days, you usually need an LTV of less than 95% (equivalent to a 5% deposit for a first time buyer) to even get a mortgage.

Borrowers who got mortgages pre-credit-crunch may be surprised if they try to add any debts to it - lenders may refuse if your LTV is too high, or make you pay for a new house valuation (if the value has dropped, that unfortunately increases your LTV, as the loan’s then a bigger proportion).

If your salary has dropped since you took out the mortgage, or your credit rating has taken a turn for the worse (eg, missed payments), you may also struggle to convince a lender to extend your mortgage borrowing.

If you didn't have to prove your income to the lender when you took your mortgage out, you definitely will if you add to the debt. Regulations now force lenders to check that you earn what you say you do and they will also want to check the mortgage debt is affordable, even if rates were to go up, so be prepared for lots of questions about your expenditure.

Factor in the impact on remortgaging too.

Even if the lender allows it, it could end up increasing the cost of your mortgage in future, which defeats the gain.

As a rough rule of thumb, mortgages get cheaper at each of the following barriers: 60%, 75%, 80%, 85%, 90% and 95% LTV. If adding debt to your mortgage pushes you above one of those thresholds, it could mean next time you want to remortgage, it’ll be costlier. So, any savings on, say, £10,000 debt shifted to the mortgage may be outweighed by the extra cost on £100,000s of mortgage debt itself.

If you shift debts to a mortgage, keep up current repayments

Please don’t interpret this guide as saying ‘never shift debts to a mortgage’. There are a number of circumstances where it will save you cash. The bigger message is to prevent people thinking it’s a no-brainer.

If you take the plunge, while it’s tempting to see it as a way to reduce your monthly outgoings too, be very wary of that, as reducing your monthly payment could seriously increase the long-term cost.

Changing your repayment can have MAMMOTH impact This is best explained by some simple numbers

The situation BEFORE shifting...
Mortgage Credit Card
Debt £100,000 £10,000
Fixed Monthly Repayment £585 £295
Interest Rate 5% 18%
Time Until Repaid 25 years 4 years
Total Interest Cost £75,500 £4,100

So that's a total £80,000 interest cost. Now let’s say we use the mortgage to clear the credit card debt.

The 3 possible situations AFTER shifting...
Scenario 1:
Repayments set at level of old mortgage only
Scenario 2:
Repayments set at midpoint between scenarios 1 and 2
Scenario 3:
Repayments kept at total level of old mortgage & credit card
Debt £110,000 £110,000 £110,000
Monthly Repayment £585 £735 £885
Interest Rate 5% 5% 5%
Time Until Repaid 31 years 19.5 years 14.5 years
Total Interest Cost £106,500 £62,000 £45,000

As can be seen the difference between the two is huge. If you just moved the cards to your mortgage and kept the same mortgage repayment (scenario 1), you'd end up paying over £25,000 more interest than keeping them separate, because it would take you so much longer to repay the whole amount.

Yet if you kept up the same total repayments (mortgage plus credit card added together - scenario 3 you'd nearly HALVE your interest costs.

Surely that beats shifting it to a credit card?

If you're looking at scenarios 2 or 3 in the above table and thinking "wow, amazing saving! Surely shifting the debt to a credit card wouldn't beat that?", hold fire. We need to compare like with like.

The equivalent to this situation is you shift your debt to a cheaper credit card, then once you've cleared the card you add those extra repayments to your mortgage and start overpaying it anyway. The results of that would be similar (or often even better) than scenario 3.

Only ever do this once...

Only do it once

This is less of a practical point and more a warning. Shifting debts onto your mortgage can be quite an psychologically easy thing to do. Many feel like the problem debts have simply disappeared as there’s no company chasing.

It therefore risks becoming a habitual pattern to clear cards with the mortgage, then start spending on them again, and clear again and again. In the past, many thought house price growth would cover the debts for them - some of those people are now in negative equity (ie, trapped as their mortgage is higher than their house’s value).

Putting your debt onto your mortgage is spending your house, keep doing it and you may have not a brick left.

Martin once met a couple who’d inherited a house and then got a mortgage out to clear some of their credit cards. Once that habit started, they kept doing it until they ended up selling the place and coming out with nothing.

So if you do shift debts onto your mortgage, think of it as a serious thing to do and a dead end for that type of borrowing. Once the cards are clear, it's time to consider cutting them up.

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